cash-out refinances
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The Benefits and Drawbacks of Cash-Out Refinancing

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A cash-out refinance is a way for homeowners to tap into their home equity and convert it to cash. With mortgage rates still near historic lows, many homeowners are considering cash-out refinances to access funds for home improvements, debt consolidation, education costs, and more. However, cash-out refinancing also carries risks and is not right for everyone. This article will examine the pros and cons of cash-out refinancing so you can determine if it aligns with your financial goals.

How Cash-Out Refinancing Works

A cash-out refinance allows you to refinance your mortgage for more than what you currently owe on your home. The proceeds from the new, larger mortgage are paid out to you in cash.

For example, let’s say you owe $200,000 on your current mortgage and your home is worth $300,000. If you refinance your mortgage for $250,000, the $200,000 would pay off your old mortgage and the extra $50,000 would be paid directly to you in cash. This allows you to tap into your home equity while keeping your same mortgage payment and interest rate.

To qualify for a cash-out refinance, you’ll need to have enough equity built up in your home. Lenders generally allow cash-out refinances of up to 80% of your home’s value. So in the example above, if your home is worth $300,000, you could potentially qualify for a cash-out refinance of up to $240,000.

Benefits of Cash-Out Refinancing

There are several potential benefits that make cash-out refinancing attractive:

Access to Cash

The main appeal of a cash-out refinance is the ability to turn your home equity into usable funds. You can use the cash for almost any purpose – home improvements, paying off high-interest debt, college tuition, starting a business, and more. For homeowners with significant equity, a cash-out refinance can provide tens of thousands of dollars or more in cash.

Consolidate Debt

By rolling high-interest debt like credit cards or personal loans into your mortgage, you can potentially lower your overall interest rate with a cash-out refinance. This allows you to pay off debt faster by having just one monthly mortgage payment at a lower rate.

Lower Monthly Payments

In some cases, you may be able to refinance into a lower interest rate than your current mortgage and lower your monthly payment, even when taking cash out. This depends on your current loan terms and home equity.

Tap Equity Without Selling

Selling your home or getting a home equity loan or line of credit are other ways to access equity. But these options may be less desirable – selling means moving, equity loans and lines have variable rates and closing costs. A fixed-rate cash-out refinance allows you to tap equity while keeping your home and payment stability.

Tax Deductible

Like traditional mortgages, interest paid on a cash-out refinance remains tax deductible. This can provide sizable tax savings for homeowners. Consult a tax professional to understand deductibility.

Drawbacks of Cash-Out Refinancing

While cash-out refinancing can be a useful financial tool, there are also some downsides to consider:

Closing Costs

Cash-out refinances come with upfront closing costs just like traditional mortgage refinances. These can amount to 3-5% of the total loan amount. This eats into the usable cash you can take out. Some lenders may offer “no-closing cost” options by rolling fees into the loan.

Lower Equity & New Debt

Since you’re taking equity out, you’ll end up with less equity in your home after refinancing. And you’ll have a new, larger mortgage balance and monthly payment. This can make it harder to qualify for future loans and decrease savings available later from your home equity.

Risk of Overspending

Having a large lump sum of cash on hand can lead some borrowers to overspend or make unwise purchases. Carefully consider your budget and long-term goals before spending cash out refinance funds.

Tax Implications

If you take cash out of a non-retirement account home equity, you may lose tax benefits down the road when you eventually sell. Consult a tax pro to understand the implications.

Mortgage Rates May Drop Further

It can be tempting to refinance when rates are low. But in the longer run, rates could drop even lower in the future. Refinancing again down the road to a lower rate may not be possible if you’ve already cashed out your equity.

Is a Cash-Out Refinance Right for You?

In general, a cash-out refinance can make sense if you have significant equity, need funds for a specific purpose like home improvements, and want to consolidate higher-interest debts. But proceed with caution – don’t take out more than you need just because rates are low. And carefully consider both the benefits and drawbacks and how they fit your financial situation. As with any major financial decision, talk to a mortgage loan officer and financial advisor you trust before moving forward with a cash-out refinance.


Cash-out refinancing allows homeowners to leverage home equity by refinancing for more than is owed and taking the difference in cash. This can provide funds for home projects, debt payoff, education, and more. However, cash-out refinancing also carries closing costs and risks like reduced home equity and overspending. Carefully weigh the pros and cons relative to your situation to decide if tapping equity through a cash-out refinance is the right move for your financial goals.

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